Are Boards Getting Shareholders Their Money's Worth? - Reinhart ...

Are Boards Getting Shareholders Their Money's Worth? - Reinhart ...

Are Boards Getting Shareholders Their Money's Worth? - Reinhart ...


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The Global M&A Boom Continues: Are Boards Getting

Shareholders Their Money’s Worth?

By Keith L. Johnson and Cynthia L. Richson


Mergers and acquisitions are rife with conflicts

of interest. 1 In addition to the divergent interests of

a target company and acquirer, transactions often

involve conflicting motivations between management

and shareholders, advisors and clients, independent

and inside directors, companies and their

various stakeholders, and inside and outside shareholders.

Among a company’s outside shareholders,

there are also likely to be divergent views between

short-term and long-term investors. Even within

individual institutional investor shareholders, there

may be conflicting interests of public and private

equity portfolio managers or between hedge fund

and long-only portfolio managers.

Moreover, investment banks have been the biggest

beneficiaries of the M&A boom with earnings

soaring at the five biggest investment banks. 2

Critics of public companies that go private allege

that some boards of directors may be accepting

deals for reasons other than best-available price and

that corporate executives are being enriched at the

expense of shareholders. Such criticism has resulted

in increased scrutiny of possible conflicts in private

equity transactions. Even the Delaware Chancery

Court has begun to question the effect that management

conflicts of interest have on negotiation and

approval of transactions where public companies

are being taken private. 3

Despite these conflicts, mergers play a critical

role in the allocation of capital in both the U.S.

and Continental Europe. 4 However, with so many

players pursuing competing agendas, it can be easy

to lose sight of the guiding economic goal that

drives merger and acquisition activity—the creation

of sustainable corporate value for shareowners.

Institutional investors can serve a key role in focusing

all of the merger and acquisition players on

the pursuit of sustainable corporate value creation.

Keith L. Johnson heads the Institutional Investor Consulting

Services section at Reinhart Boerner Van Deuren sc and Cynthia

L. Richson is the Founder of Richson Consulting Group, llc.

Mr. Johnson formerly was Chief Legal Counsel of the State of

Wisconsin Investment Board (SWIB) and Ms. Richson formerly

was the Corporate Governance Officer for the Ohio Public

Employees Retirement System (OPERS).

Viewing transactions from the perspective of longterm

institutional investors, as fiduciaries with an

obligation to serve the best interests of their ultimate

beneficiaries, can provide a clear path through

this jungle of conflicts.

A recent survey of corporate directors found

that almost 62 percent agreed with the statement,

“On balance, mergers and acquisitions destroy

more value than they create.” 5 There are numerous

examples of mergers that have gone very badly 6

and an aggregate wealth loss of $240 billion for

acquiring firm shareholders from mergers during

1998 to 2001. 7 Institutional investors have been

burned and are becoming more skeptical about

proposed transactions. With the recent growth in

merger and acquisition activity, this skepticism may

be healthy. 8

Role of Institutional Investors

As a group, institutional investors have an overwhelming

financial incentive to promote integrity

of the merger and acquisition process and good

corporate governance is beneficial to both stockholders

and bondholders. 9 They own 59 percent of

United States public company stock. 10 Institutional

investor ownership of the largest companies is even

more concentrated, at 69 percent for the Fortune

1000. Pension funds alone own 28 percent of

United States public equities; mutual funds own 20

percent; insurance companies own 9 percent; and

banks and foundations both own less than two percent

each. In addition, pension fund equity assets

tend to be heavily indexed, with over 41 percent

invested passively in index funds. 11 Ownership of

public companies in the United States tends to be

broadly dispersed.

In Canada, public company ownership is more

concentrated than in the United States. About 75

percent of companies listed on the Toronto Stock

Exchange have a controlling shareholder, which

may be a founding family or an institutional investor.

12 Control is often maintained through issuance

of dual class stock, with the controlling shareholder

owning a substantial block of the voting class. 13

Volume 15, Number 5 25 The Corporate Governance Advisor

Despite these differences, institutional investors

play a determinative role in the system for corporate

acquisitions in both markets.

The interests of different kinds of institutional

investors, however, can vary considerably. Pension

funds, particularly large public pension funds, are

more heavily indexed and universally invested. 14

This broadly exposes them to market developments

over the long term and predisposes pension fund

managers to take an interest in market integrity

issues and sustainability of corporate performance.

Actively managed mutual fund portfolios, on the

other hand, are more likely to trade often, resulting

in average portfolio turnover of holdings of less

than a year. 15 Accordingly, mutual fund managers

often have a shorter-term view, preferring immediate

profits over building long-term corporate

wealth. Some hedge funds that pursue short-term

strategies have similar interests. Investment managers

that short stock as part of their investment

strategy may even have a vested interest in seeing

declining company fortunes. 16

The impact of these diverging interests was

born out in a 2006 study by Lily Qiu at Brown

University. 17 She reported that acquirers with large

public pension fund shareholders performed relatively

better in the long run than other acquirers

and had fewer value destroying acquisitions. She

also found that mutual fund ownership was positively

associated with future merger and acquisition

activity, and that acquirers with more mutual fund

ownership performed worse in the stock market. 18

Private equity funds are also having an increased

impact on merger and acquisition activity. With

larger amounts of institutional investor money

being allocated to private equity, the number of

companies being taken private in management

buyout transactions bankrolled by private equity

and hedge funds has mushroomed. 19 One of the

results of this “going private” trend has been to

move increases in value achieved in corporate turnarounds

from public to private market investors. 20

Even for institutional investors that participate in

management buyouts through private equity funds,

the net effect of transferring gains to private market

portfolios may not offset the corresponding

losses to the institutional investor’s public portfolios

(including combined index fund and passively

managed portfolio exposure). 21

In response, some public market investors have

begun to fight back against management buyouts. 22

Shareholders filed a lawsuit in New York City in

November 2006 alleging that 13 private equity firms

conspired to fix buyout prices by bidding collusively

in transactions involving three public companies. 23

A related United States Justice Department investigation

is also pending.

Institutional Investor Issues in

Mergers and Acquisitions

The varying interests of institutional investors

result in different views on issues that arise in merger

and acquisition transactions. Understanding these

differences between investors presents both challenges

and opportunities to other transaction participants.

Hot button issues can include the following:

(1) Short-term gains versus sustainable longterm

wealth : Although pension funds and most

of the investors in mutual funds are investing to

meet long term goals, many of the portfolio managers

that serve as the stewards of their assets

operate with a short-term investment horizon that

is driven by competitive pressures. In both the

United States and Canada, pension funds control

more wealth than any of the other institutional

investors. However, many pension fund managers

delegate investment responsibility for large chunks

of those assets to external investment firms, which

are then evaluated on a quarterly basis and paid on

assets under management rather than performance

over any particular time period. This can result in

a disconnect between the long-term interests of

underlying investors and the strategies of portfolio


Short-term investors are more likely to support

merger and acquisition strategies that emphasize the

creation of immediate gains, even at the expense of

a company’s future health. However, investors that

take a truly long-term view are likely to be more

open to considering the impact of a transaction on

sustainability of performance and support strategic

plans that will build company value over several

years. Where there is a tension between the shortterm

and long-term impact of a transaction, many

institutional investors will want to evaluate how it

fits with their investment horizon. For example, risks

relating to company reputation, future regulatory

changes and product obsolescence may be of more

The Corporate Governance Advisor 26 September/October 2007

concern to long-term investors, particularly those

with index fund exposure to the company. 24

Boards have been accorded wide business judgment

discretion to determine when a company

should pursue long-term strategic business goals

over maximization of short-term returns. 25 They

can use this discretion to align with long-term investors

in pursuing strategic plans to create sustainable

corporate wealth. However, when communicating

about strategic plans with portfolio staff at institutional

investors, companies might need to stress

this fundamental alignment of long-term interests

between the company and the institutional investor’s

clients or beneficiaries.

(2) Alignment of Executive Compensation with

Investor Interests : While change in control payments

were originally intended to remove any disincentive

for target company executives to oppose a transaction

that could cost them their jobs, the payments

have become large enough at many companies to

create an economic incentive for executives to support

a transaction regardless of whether it is in the

best interests of shareholders. In addition, where

executives will receive other compensation from

the acquirer or accelerated vesting of options in

connection with the transaction, change in control

payments may be unnecessary. At their worst, these

payments can add up to huge amounts that appear

to be an inappropriate reward for the company’s

underperformance that lead to the transaction.

In addition, studies have found that the amount

of compensation an executive receives is mostly

related to size of the company. 26 This creates an

incentive for executives of acquiring companies

to undertake acquisitions merely to obtain an

increased compensation award—a disastrous combination

for shareholders when combined with the

poor track record for acquisitions.

Management buyouts can also present the opportunity

for misalignment in payments to executives.

Private equity firms can often offer the executives

added bonuses and options in the new company,

which may not be publicly reported until long after

the transaction has been completed, if ever. 27 The

use of substantial private payments to a company’s

executives in a going-private transaction raises

questions about whether the executives were essentially

“bought off.” 28 In two June 2007 decisions,

the Delaware Chancery Court even temporarily

enjoined acquisitions of Lear Corporation and The

Topps Company because public shareholders were

not informed of the role that personal financial

interests of management at the companies might

have played in favoring private acquisitions. 29

In addition, research indicates that company management,

preceding a management buyout, tends to

record lower than expected accounts receivable and

otherwise engage in financial manipulation to make

company performance look worse. 30 Public shareholders

bear the brunt of these shenanigans.

Companies would be well-served to make any

change in control payments subject to approval by

the shareholders. 31 Greater and more timely transparency

would also help to eliminate (or confirm)

suspicions about the size and extent of executive

compensation related to a proposed change in

control. 32 Boards should make sure they are aware

how large total change in control payments could

be, well in advance of any transaction, in case they

need to be revised. Excessive golden parachute

payments, cash out of options, tax gross ups,

forgiveness of corporate loans, unearned retirement

program contributions and compensation

that rewards poor performance are particularly

objectionable to investors.

(3) Independent Committees and Independent

Advisors : Inside directors, investment banks, compensation

consultants and other advisors involved

in transactions often have conflicts of interest. For

example, payment of a success fee or use of “stapled”

financing where the investment bank advising

the target also provides financing to the acquirer,

gives the investment bank a financial interest in

ensuring success of the transaction. The prospect

of future business from a serial acquirer or private

equity fund could also bias an investment bank

toward ensuring a transaction closes. Fairness opinions

from investment banks with a vested interest in

the transaction are loaded with litigation risk. 33 In

addition, use of compensation consultants that also

do significant work for management could result in

the board receiving biased advice.

Boards could do a better job separating good

from bad acquisitions by making more effective use

of independent board committees and by retaining

independent advisors to review the transaction.

While inside directors may balk at the idea, the

practice is becoming more prevalent. In a recent

Volume 15, Number 5 27 The Corporate Governance Advisor

survey of corporate directors, 30 percent said that

they always engage independent board advisors

when contemplating a purchase or sale. 34 An additional

32 percent said that they “sometimes” engage

an independent board merger and acquisition advisor.

35 Fifty four percent of the director respondents

reported having voted down or materially changing

a contemplated transaction.

Retention by the board of an independent investment

banking firm with specialized industry knowledge

can bring a fresh view to evaluation of a

transaction and even identify alternatives. In order

to be truly independent, the firm cannot be paid an

incentive or success fee. Directors could also limit

their legal exposure and the company’s downside

risk by obtaining a (second, if necessary) fairness

opinion from an independent valuation firm. 36 The

board should not place restrictions on the fairness

evaluation (such as unrealistic assumptions) that

will reduce its reliability.

Finally, the success of a merger or acquisition

does not depend solely on making the right decision

up front. Integration planning and implementation

are just as critical. Failure to address

cultural differences and poor strategic planning or

implementation are often cited as common reasons

why business combinations fail. The board’s duties

do not stop once a transaction has been closed. In

fact, companies might want to consider deferring a

portion of the fee of key advisors until integration

plans have been executed. This would move the

focus toward delivery on the promises cited when

the deal was proposed and align advisors with longterm

shareholders. Disclosure of the company’s

advisors’ long-term merger and acquisition success

rate in previous transactions would also be helpful

to both the board and shareholders. 37

(4) Corporate Governance Issues : The quality

of a company’s corporate governance will often be

evident in the way it approaches a potential transaction.

Shareholders and their advisors will be

evaluating the strategic rationale, process fairness,

valuation decisions, conflicts of interest, executive

compensation, use of takeover defenses and company

governance profile to determine the quality

of the company’s corporate governance. This will

be an ongoing process that is done on a case-bycase

basis. Proxy voting consultants usually play

a key role in advising shareholders on transactions

that require a shareholder vote, though

their recommendations may not be determinative

for sophisticated institutional investors that make

their own decisions on merger and acquisition

transactions. Ultimately, shareholders will take

corporate governance into consideration as one of

the factors that are weighed when making a vote or

tender decision. 38

The more confidence shareholders have that

a company’s board is aligned with the interests

of its owners, functioning independent of management

and acting in the shareholders’ best

interests, the more likely shareholders will defer

to the board’s recommendation. Clear communication

with shareholders and their advisors is

vitally important to establishing and maintaining

this kind of trust. It is important that companies

identify where, within the management structure

of their large institutional shareholders, the final

decision will be made on a vote or tender offer and

engage with that part of the organization directly

when issues arise. 39

The following are among the corporate governance

concerns that shareholders assess when considering

whether a board is likely to act in the best

interests of long-term shareholders when evaluating


Are anti-takeover devices structured to insulate

management or are they subject to shareholder


• Does the company have a strongly independent

board or is the board controlled by management?

• Is there a classified board structure that makes it

difficult to change the board?

• Has the company adopted a requirement that

directors receive a majority of the votes cast in

order to be elected?

• Is there a supermajority voting requirement for

approval of takeovers that allows minority or

inside shareholders to block transactions?

• If the CEO is also Board Chair, is there an effective

and independent lead director?

• Do the directors have individually significant

holdings of company equity to align their interests

with shareholders?

The Corporate Governance Advisor 28 September/October 2007

Are excessive change in control or other gratuitous

executive compensation payment provisions

in place?

Are executive compensation practices inconsistent

with “pay for performance” principles, such

that it appears the board has been captured by

management or that management incentives are

misaligned with shareholders?

• Have independent advisors been retained to

assist an independent committee of the board in

evaluating the transaction?

Are success fee payments or other advisor conflicts

of interest present in the transaction?

• Does the company have a history of successful

mergers and acquisitions?

• What is the company’s corporate governance

rating and what do the rating firms view as the

company’s governance weaknesses? 40

• Emerging Trends : Private equity deals have

accounted for more than a third of all merger

activity this year and 40 percent of US M&A

activity this quarter, the highest level ever. 41

Private equity is reshaping the public markets

with new trends such as “stub equity” where

public shareholders can exchange some of their

shares for securities in the new, privately owned

company. 42

Stub equity deals, such as the buyout of Harman

International Industries Inc. by Kohlberg, Kravis,

Roberts & Company (KKR) and Goldman Sachs

Group Inc., have allowed public equity holders

to participate in the upside value inherent in their

equity. However, stub equity typically provides no

shareholder rights to holders and leaves them at

the mercy of the company’s new private equity firm


In addition, private equity firms such as

Blackstone and KKR are raising money through

initial public offerings of their management subsidiaries,

without making the public disclosures the

Securities and Exchange Commission requires of

Registered Investment Advisors—a feat described

by some as cracking the code on how to function as

a private company in the clothing of a public company.

43 Such structures leave shareholders of the

private equity management companies with little

information and virtually no say in the company’s

management or investment decisions. 44 The funds

generated through these offerings also provide the

private equity firms with additional capital that is

controlled by the managers.

This creation of stub equity holders and private

equity management firm shareholders, both with

economic interests but virtually no governance

rights, provides potential economic advantages for

them while creating new agency risks from the inherent

conflicts of interest they have with the private

equity firm managers. Will the private equity firm

managers find ways to divert value away from stub

equity holders through generation of additional

fees that are paid by the underlying companies to

the management firms? Will they frustrate stub

holders by engaging in balance sheet structuring

that steers earnings away from equity?

One thing is certain, this new private equity

environment will place even more pressure on public

company boards to protect their shareholders

from being taken advantage of in going-private



Boards need to be keenly aware of the divergent

interests of different shareholders. They are charged

with balancing those interests in pursuing the

creation of sustainable corporate wealth. Current

evidence suggests that companies have generally not

done a good job in handling mergers and acquisitions.

However, by proactively seeking to develop a

long-term shareholder base, addressing conflicts of

interest, aligning executive compensation incentives

with shareholders and adopting corporate governance

best practices, boards could improve their

merger and acquisition track record. Company

advisors and consultants could also be more effective

in helping to identify transactions that will

build sustainable value.


1. Robert Kindler, Vice Chairman for Investment Banking

at Morgan Stanley recently said on a panel at the Corporate

Law Institute at Tulane University, “We are all totally conflicted—get

used to it.” Morgan Stanley advised the Tribune’s

special committee of independent directors in the recent sale of

Volume 15, Number 5 29 The Corporate Governance Advisor

the company. Stuart Goldenberg, “When a Bank Works Both

Sides,” The New York Times, April 8, 2007.

2. Net income in the past 12 months at the five largest

investment banks has skyrocketed: Goldman Sachs: 56%,

Morgan Stanley: 68%, Merrill Lynch: 110%, Lehman Bros.:

17%; and Bear Sterns: 31%. John Waggoner, “Investment

Banks Benefit Most from M&A Mania,” USA Today, May

25, 2007.

3. Peter Lattman and Dana Cimilluca, “Court Faults Buyouts,”

The Wall Street Journal, July 12, 2007, citing temporary injunctions

issued by the Delaware Chancery Court in acquisitions

of Lear Corporation and The Topps Company due, in part, to

undisclosed compensation arrangements of private acquirers

with the management of public companies.

4. For the first time, Continental European firms were as

eager to participate as their U.S. and U.K. counterparts in

the fifth M&A wave during the 1990s and M&A activity since

January 1, 2007 is 63% higher than in 2006 on track to set

another record. Mergers and Acquisitions in Europe, Marina

Martynova and Luc Rennenboog, January 2006, SSRN.com;

and “Huge deals fuel record-breaking M&A,” Financial Times.

com, May 7, 2007.

5. Directors and Boards, August Question of the Month, http://


qomaugust2006.html (visited September 5, 2006).

6. For example, Robert F. Bruner, in his book “Deals from

Hell,” cites the AOL Time Warner merger as a champion of

failed mergers, ultimately resulting in a US$200 billion loss

in stock market value and a US$54 billion write-down in the

combined company’s assets.

7. “Institutional Investors’ Trading Behavior in Mergers

and Acquisitions, Rasha Ashraf and Narayanan Jayaraman,

Georgia Institute of Technology, March 27, 2007, available at


8 The volume of mergers and acquisitions during the first

nine months of 2006 was at a record US$2.7 trillion. Lina

Saigol and James Politi, “Rise in Hostile Bids Pushes M&A to

Record,” Financial Times, September 29, 2006. According to

Thompson Financial, from 2005 through July 13, 2007 there

have been 1,287 levereged buyouts with a total value of $787

billion. Michael J. de la Merced, “An I.P.O. Glut just Waiting

to Happen,” The New York Times, July 15, 2007.

9. The Impact of Shareholder Power on Bondholders:

Evidence from Mergers and Acquisitions, Angie Low, Anil

K. Makhija, and Anthony Sanders, March 1, 2007, SSRN.


10. The Conference Board, “Institutional Investment Report

2005,” citing ownership as of 2003.

11. Id.

12. Aviv Pichhadze, “Mergers, Acquisitions and Controlling

Shareholders: Canada and Germany Compared,” 18 Banking

and Finance Law Review 341 (June 2003).

13. Id.

14. The Conference Board, “Report of the Commission on

Public Trust and Private Enterprise,” January 2003.

15. Id.

16. A recent study by Bernard Black and Henry Hu documented

a number of instances where hedge funds and other

investors have used swaps, short sales, derivatives, borrowed

stock, hedging and other techniques to acquire voting rights

on acquisitions in which they held no overall economic interest.

The shares were then voted without regard to whether they

believed the transaction would benefit the company. Henry

T. C. Hu and Bernard Black, “The New Vote Buying: Empty

Voting and Hidden (Morphable) Ownership” 79 Southern

California Law Review 811 (2006).

17. Lily Qui, “Which Institutional Investors Monitor? Evidence

from Acquisition Activity,” http://www.econ.brown.edu/fac/lily_qiu

(visited August 13, 2006).

18. Id. A one percent increase in mutual fund ownership was

found to be associated with a reduction of six to 131 basis

points in various 12-month returns, including the transaction

announcement month.

19. Allocation of assets by the top 200 pension funds grew by

14 percent in 2005, to US$97 billion, while allocations to hedge

funds grew 42 percent, to US$30 billion but still amounts to

only about five percent of assets. Pensions & Investments,

January 23, 2006. The number of private buyouts announced

for European companies increased by 320 percent between

2001 and 2005. Jason Singer, “In Twist for Private Buyouts,

Some Shareholders Fight Back,” Wall Street Journal, August

18, 2006. Private equity deals in the United States are on

track to be twice the value in 2006 than they were in 2005.

Anna Driver, “Holders Sue Private Equity Firms Over Deals,”

Reuters News Service, November 15, 2006.

20. For example, the Blackstone Group took Celanese private

in December 2003 in a deal it valued at US$4 billion. One year

later, it was sold back to public investors for US$6.5 billion, with

virtually no changes other than shifting its stock market listing

the United States. Breaking Views, “On Going Private: Investors

Beware,” Wall Street Journal, November 18–19, 2006.

21. For example, where an institutional investor has combined

passive and active portfolio holdings that total four percent of a

company’s public equity and ends up with a four percent stake in

the private equity fund, it is likely that the investor will have lost

at least 20 percent of it’s equity stake in the company to private

equity fund fees and management’s carried interest. If the company

could have been turned around as a public company, the

investor has essentially benefited the private equity fund managers

and company executives at the expense of its own investors

or beneficiaries. However, this loss will be largely invisible if

the investor measures its performance against an index-relative

benchmark. The investor’s private equity portfolio managers will

obtain a nice return, and the public equity portfolio managers

will not be aware of the returns that were transferred elsewhere.

22. Several large investors, including Knight Vinke Asset

Management, fought the sale of VNU to a group of private

equity firms last summer, arguing that the small premium being

offered did not merit leaving the rich profits on the table that

the private equity investors would reap from quickly restructuring

VNU. While the transaction eventually went through, the

shareholders did win an increase in the purchase price. Jason

Singer, “In Twist for Private Buyouts, Some Shareholders Fight

Back,” Wall Street Journal, August 18, 2006.

23. Company transactions involved in the lawsuit are Univision

Communications, HCA Inc. and Harrah’s Entertainment.

The Corporate Governance Advisor 30 September/October 2007

24. Companies with long-term strategies might also want to

undertake proactive efforts to establish a base of shareholders

inclined to take a long-term view. This is one of the recommendations

in the “Report of the Commission on Public Trust and

Private Enterprise” issued by The Conference Board, January


25. In Unocal Corp v. Mesa Petroleum Co., 493 A.2d 946 (Del.

1985) the Delaware Supreme Court said that boards could

consider the disparate interests of short-term speculators and

long-term investors and authorized boards to even favor longterm

investors over shareholders who wanted a quick profit.

However, once a board has decided to sell control of a company,

they have an obligation to serve as auctioneers and get

the best price for shareholders. See Revlon, Inc. v. MacAndrews

& Forbes Holdings, Inc., 506 A.2d 173 (Del. 1985).

26. Lucian Arye Bebchuk and Yaniv Grinstein, “Firm

Expansion and CEO Pay” (November 2005). Harvard Law

and Economics Discussion Paper No. 533. Available at SSRN:


27. For example, in the Celanese management buyout, the

company’s executives are reported to have received optionrelated

compensation that was worth US$65 million when the

company went public again, on top of salaries and bonuses.

Breaking Views, “On Going Private: Investors Beware,” Wall

Street Journal, November 18–19, 2006. In addition, the AFL-

CIO recently challenged the proposed IPO of the Blackstone

Group and the private equity firm’s claim that it is not an

investment company so it can sell its shares to the public

without being regulated by the Securities and Exchange

Commission under the Investment Company Act of 1940.

“Union Takes Aim at Blackstone I.P.O.,” The New York Times,

Dealbook, May 16, 2007.

28. The California Public Employees Retirement System recently

opposed a merger of United Health Group with PacifiCare

Health Systems unless the companies held a shareholder vote

on proposed executive bonuses to be paid in the transaction.

In 2005, Molson reduced change in control payments to satisfy

shareholders before its merger with Adolph Coors.

29. After listing the financial advantages offered to management

by a private acquirer, the Delaware Chancery Court

concluded, “Put simply, a reasonable stockholder would want

to know an important economic motivation of the negotiator

singularly employed by a board to obtain the best price for the

stockholders, when that motivation could rationally lead that

negotiator to favor a deal at a less than optimal price, because

the procession of a deal was more important to him, given his

overall economic interest, than only doing a deal at the right

price.” In Re: Lear Corporation Shareholder Litigation, C.A.

No. 2728-VCS (June 15, 2007). The deal was subsequently

rejected by Lear shareholders. See also In Re: The Topps

Company Shareholders Litigation, C.A. No. 2786- VCS (June

14, 2007).

30. Carol A. Marquardt and Christine I. Wiedman, “How are

Earnings Managed? An Examination of Specific Accruals,”

Contemporary Accounting Research, Vol. 21, No. 2, Summer


31. On April 20, 2007, the U.S. House of Representatives

passed “The Shareholder Vote on Executive Compensation

Act” by a vote of 269–134., which is also applicable to merger

and acquisition transactions. http://financial services.house.

gov/ExecutiveCompensation.html. The bill will move next to the

Senate Banking Committee.

32. In management buyout situations, outside shareholders

would benefit from obtaining full knowledge of all consideration

that is or will be paid to management. The conflicts of

interest associated with management participation in a buyout

from outside shareholders are especially troublesome.

33. The National Association of Securities Dealers has been

investigating concerns about conflicts of interest in the issuance

of fairness opinions. It has proposed a disclosure-based

approach to highlighting conflicts which many view as inadequate

to address the fundamental flaws associated with using

conflicted financial advisors. Federal Register, Vol. 71, No. 69,

April 11, 2006.

34. Directors & Boards, “The Directors & Boards Survey:

Mergers & Acquisitions,” Boardroom Briefing, Fall 2006.

35. Id. The most common independent advisors directors

reported using were the board’s law firm (31 percent), the

board’s own M&A firm (27 percent) and the board’s accounting

firm (27 percent).

36. For example, recent deals where independent fairness opinions

were obtained include sales of May Department Stores,

Albertsons, Constellation Energy, Sungard Date Systems,

Dex Media and Texas Instruments’ sensors and controls business.

See Jeffrey Williams, “What Directors Need to Know

About Fairness Opinions,” Boardroom Briefing: Mergers &

Acquisitions, Directors & Boards, Fall 2006.

37. An analysis done for the New York Times by Capital IQ,

a business unit of Standard & Poors, shows that the track

record for buyer performance after a major acquisition varies

substantially between investment banks involved in advising

buyers. “ They’re All No. 1, but Are They Worth It?” The New

York Times, Dealbook, August 5, 2007.

38. Institutional investors that are not happy with a proposed

transaction may publicly oppose it. For example, the California

Public Employees Retirement System recently opposed a merger

of United Health Group with PacifiCare Health Systems

because of executive bonuses to be paid in the transaction.

39. Some institutional investors will delegate responsibility to

their external investment managers and some will retain final

authority, with decisions made by the chief investment officer,

portfolio manager, proxy voting administrator or other officer.

40. Several shareholder advisory firms (e.g., Institutional

Shareholder Services, Governance Metrics International and

The Corporate Library) evaluate and rate companies on their

corporate governance.

41. Dana Cimilluca, “Private Equity Fuels Record Merger

Run,” Wall Street Journal, July 20, 2007.

42. Dennis Berman, “Unusual Buyout Offers a Piece to

Shareholders,” Wall Street Journal, April 27, 2007.

43. Henry Sender and Monica Langley, “How Blackstone’s

Chief Became $7 Billion Man,” Wall Street Journal, June 13,


44. Dennis Berman, “Latest Trend in Big Buyouts: Blend of

Public, Private Traits,” Wall Street Journal, May 22, 2007.

Volume 15, Number 5 31 The Corporate Governance Advisor

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